Banco Bradesco S.A. — FY2010 Form 20-F Summary
Business context and period: Annual report for the fiscal year ended December 31, 2010, filed May 20, 2011. Bradesco is a full-service Brazilian financial group, operating mainly in Brazil across banking, insurance, pension plans and asset management. Financial statements are audited and prepared under U.S. GAAP; amounts below are in Brazilian reais (R$) unless stated otherwise. This is an annual filing, not a standalone fourth-quarter report.
Key financial metrics
| Metric | FY2010 / year-end 2010 | FY2009 / year-end 2009 | Change |
|---|---|---|---|
| Net interest income | R$37.492bn | R$33.133bn | +13.2% |
| Provision for loan losses | R$5.769bn | R$10.822bn | -46.7% |
| Non-interest income | R$30.170bn | R$31.734bn | -4.9% |
| Non-interest expense | R$46.713bn | R$40.376bn | +15.7% |
| Income before taxes | R$15.180bn | R$13.669bn | +11.1% |
| Parent-company net income | R$9.662bn | R$9.216bn | +4.8% |
| Total assets | R$621.612bn | R$496.815bn | +25.1% |
| Total loans, gross | R$219.283bn | R$179.934bn | +21.9% |
| Customer deposits | R$192.928bn | R$170.363bn | +13.2% |
| Shareholders’ equity, including noncontrolling interest | R$52.832bn | R$46.110bn | +14.6% |
Profitability and margins: Net interest margin was 8.0%, down from 8.2%; net yield on interest-earning assets was 5.9%, versus 6.2%. Return on average parent-company equity was 21.8%, versus 23.4%, and return on average assets was 1.8%, versus 2.0%. Common and preferred earnings per share were R$2.45 and R$2.68, respectively.
Asset quality: Nonperforming loans (60 days or more overdue) were R$10.082bn, or 4.6% of loans, down from R$11.092bn and 6.2%. The allowance for loan losses was R$15.123bn, 150.0% of nonperforming loans, versus R$14.572bn and 131.4% in 2009. Net charge-offs were R$5.218bn, down 20.6%.
Cash flow and liquidity: Net cash provided by operating activities was R$7.949bn, compared with R$18.821bn in 2009. Investing activities used R$150.456bn, chiefly reflecting increases in compulsory Central Bank deposits, lending and securities purchases; financing activities provided R$95.019bn. Cash and cash equivalents fell R$47.488bn to R$36.494bn. Compulsory deposits rose 99.4% to R$65.198bn following regulatory increases and deposit growth. The company reported R$17.276bn of Brazilian government securities in its trading portfolio potentially available for Central Bank redesconto funding; it said it had never used redesconto for liquidity purposes.
Debt and capital: Long-term debt increased to R$75.237bn from R$50.817bn, mainly due to higher local onlending funding and subordinated debt. Federal funds purchased and securities sold under repurchase agreements increased to R$160.701bn from R$108.357bn. The Brazilian regulatory capital ratio was 14.74%, above the 11% minimum, but down from 17.83%; excess capital over the regulatory minimum declined to R$14.253bn from R$21.419bn. Bradesco reported compliance with capital requirements.
Material changes and drivers
- Brazil’s economy rebounded: GDP grew 7.5% in 2010 after a 0.2% contraction in 2009; the real appreciated 4.3% against the U.S. dollar during 2010, and the Selic rate rose to 10.75% at year-end from 8.75%.
- Loan growth and improving credit quality lifted net interest income and sharply reduced loan-loss provisioning. Individual lending grew particularly quickly, including mortgages, vehicle and consumer finance.
- Non-interest income fell despite higher fee income, insurance premiums and pension income. Net trading gains fell to R$1.189bn from R$3.075bn; other non-interest income fell to R$1.957bn from R$5.342bn. The prior-year comparison benefited from a R$2.410bn partial sale of Cielo shares and a R$732m gain on the Odontoprev transaction.
- Operating expenses rose 15.7%, including higher salaries, administration costs, insurance claims and amortization. Growth in expenses outpaced parent-company net-income growth.
- Insurance, pension and certificated-savings operations reported parent-company net income of R$3.229bn, up from R$3.007bn; banking segment parent-company net income was R$6.233bn, up from R$6.157bn.
Outlook, risks and unusual items
Outlook and management commentary: Management described Brazil’s long-term outlook as favorable and expected domestic demand, credit and insurance needs to support growth. Its stated priorities include expanding the customer base and distribution channels, strengthening lending and insurance, improving efficiency, investing in technology, and maintaining risk controls. It targeted an increase in average products per client from 4.8 at December 2010 to 5.0 by December 2011. The filing does not provide formal earnings or revenue guidance. Capital expenditures in 2011–2013 were expected not to be substantially greater than historical levels and to be funded from internal resources.
Principal risks: Exposure to Brazil’s economic, political, regulatory, inflation, interest-rate and foreign-exchange conditions; credit deterioration as the rapidly growing loan book seasons; securities valuation and trading volatility; counterparty and derivative risks; competition; changes in compulsory reserve requirements and taxes; insurance claims and reserve estimation; and cybersecurity/operational risks. The filing also notes that preferred shares and ADSs generally lack voting rights and that Brazilian securities markets may be less liquid than major U.S. markets.
Contingencies and other items: Litigation provisions were R$13.281bn at year-end, comprising approximately 68.2% tax, 19.9% civil and 11.9% labor matters. Possible-loss tax assessments not accrued were R$614m in the financial-statement notes; management stated it considered provisions sufficient for probable losses. A 10% increase in modeled probability of default would have increased the loan-loss allowance by R$311m, according to a hypothetical sensitivity analysis. Level 3 trading and available-for-sale fair-value assets totaled R$20.702bn. Management and the independent auditor concluded internal control over financial reporting was effective as of year-end.
Investor verification priorities:
- Reconcile FY2010 net interest income, loan-loss provision, non-interest income and expenses to the audited U.S. GAAP statements, and assess recurring earnings apart from the 2009 Cielo and Odontoprev gains.
- Review loan growth, nonperforming-loan trends, charge-offs, allowance coverage and the sensitivity of reserves to changes in default assumptions.
- Assess the liquidity implications of the R$47.488bn decline in cash equivalents, rising compulsory deposits and increased repurchase-agreement funding.
- Verify capital headroom and the effects of higher regulatory capital requirements, subordinated debt eligibility and planned Basel III implementation.
- Review the R$13.281bn litigation provision, the R$614m possible-loss tax assessments, and the assumptions behind insurance and pension reserves.
- Confirm the status, final terms and regulatory approvals of the CBSS/Elo transactions and other post-year-end strategic agreements.